Anxiety over Swine flu

April 29, 2009 — Mitul Kotecha

Although I have been writing about various factors that could derail the rally in equity markets and improvement in risk appetite over recent weeks I did not envisage that a virus such as Swine flu would be one of the factors to consider. However, it is and the stress and anxiety about its effects on the economy and of course health are rising rapidly.

In Hong Kong where I have been based for the last 8 months the concerns are particularly acute. Exposed from a high proportion of tourism as a percent of GDP, high population density and its importance as an air travel hub, Hong Kong is somewhat more sensitive than many other countries. Moreover, the memories of SARS and its devastating impact on the economy still linger for many people. A local paper revealed such tensions in its headline, “its creeping closer”

Nonetheless, there is little in terms of concrete evidence to go on and outside of Mexico the health impact of the virus has not been as severe. Even in Mexico there have been conflicting reports about the actual amount of deaths, with some putting it at a much smaller number. Until there is some clarity markets will continue to react to the uncertainty. The rapid spread of the flu has sparked fears of a global pandemic but it has yet to be categorized as such.

Risk indicators have not yet reacted sharply even if equity markets have been hit over recent days, suggesting that at the least there is not a panic in markets. Even the usual FX beneficiaries of higher risk aversion such as the US dollar and Japanese yen have not strengthened and remain in a broad range. It is difficult to predict the damage from the flu and much depends on its severity and how much it spreads but the relative calm in the market is at least encouraging for now.

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What drives currencies?

April 7, 2009 — Mitul Kotecha

Currency forecasting is never an easy thing to do. The drivers of currencies appear to change over time making it quite tough to develop forecasting tools with great accuracy. This is not an excuse from someone who has been trying to analyse currencies for a number of years but just a statement of reality. Over the past year or so one of the biggest drivers of currencies has been risk appetite. As equity markets sank in 2008 the main winners were the dollar and yen both of which appreciated due to strong repatriation flows and safe haven demand. This influence of risk in determining currency movements saw historical influences such as interest rate differentials pushed into the background.

Where does it leave FX now? Well, if the rally in equity markets continues it implies that both the dollar and yen will fall further whilst long suffering currencies such as the pound will strengthen further. In the pound’s case it has a lot of room to recover given that is massively undervalued by many measures. For instance during my time in Hong Kong the pound against the dollar has dropped by around 30% making things look far more expensive than when I first came. However, to a foreigner UK assets now look quite well priced and London is no longer such an expensive city. Add in the steep drop in house prices and the UK looks even more competitive. This will no doubt benefit the economy in time.

So if the current risk/FX relationship holds it means that we should all be watching equity markets to see where currencies are going to move over coming months. If equity markets fail to sustain their rally it could put the dollar back on the front foot which will see the pound back under pressure. Eventually the dollar will weaken as risk appetite improves and when that happens the pound may be one of the main beneficiaries.

Ps. I hope this works as I am posting this article on holiday. It also means that my contributions may be a bit more sporadic over the next couple of weeks.

Posted in Currencies, Economics, equity markets, Financial crisis. Tags: , , , , , , . 4 Comments »

Spinning the G20

April 4, 2009 — Mitul Kotecha

There seems to been a lot of spin put on the amounts of money pledged in the wake of the G20 summit in London. A lof the money appears to have already been committed and the actual amount of new discretionary fiscal spending is a lot less than the $5 trillion in fiscal spending that was announced.

Even the $1.1 trillion that was all over the headlines in terms of the “additional programme of support” looks overblown. Immediate contributions will only amount to $250 bn and much of this has already been pledged prior to the summit. The timing of the rest is unclear. The $250 bn in SDR‘s will simply be created from thin air, rather like printing money and most of the the $250bn in trade finance will come from the private sector.

Concerns about the actual amount of new money from the G20 meeting may lead to reassessment of the initial euphoria in markets seen last week.

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Even Geithner would like a global currency

March 26, 2009 — Mitul Kotecha

Around the same time as I was writing about the end of the US dollar US Treas Sec Geithner was telling us how he actually liked the idea of a global currency as purported by China’s central bank governor. Of course the news didn’t go down too well in the FX markets, with the dollar dropping like a stone before Mr Geithner realised the error of his ways and clarified his comments. He went on to say the dollar is still the best reserve currency in the world but added a caveat that this would only continue if the economy and markets got back on their feet. The pros and cons of a new reserve currency have now been much debated and as noted in my previous post it will provide great fodder for markets at the G20 meeting in London next week.

As usual we are all in for disappointment, however. There will be no great change in perspective on the dollar or any other currency as UK PM Brown hinted today. Instead G20 officials will do their best to show an act of unity whilst sniping at each other’s stimulus plans in the background. Do not expect conrete policy measures emerge either. It has been a rare occassion when such get togethers yield more than a nice photo shoot of world leader.

On a completely different note it is intriguing to see how deep the loss in wealth has become when the likes of the comedian John Cleese are renegotiating their divorce settlements. A local free Hong Kong newspaper put it as the “battered rich want divorce terms slashed”.  Battered indeed.

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End of the road for the dollar?

March 25, 2009 — Mitul Kotecha

The comments by China’s central bank governor  about the US dollar have provoked much speculation ahead of next week’s G20 meeting in London about the potential for the world’s biggest reserves holder (around $2 trillion) to shift away from dollars. The idea of China’s central bank governor is to use SDRs as an alternative to the US dollar. China’s concerns focus on the risks of a big increase in inflation in the wake of the Fed’s plan to move to full blown quantitative easing by buying US Treasuries as well as the massive blowout in the US budget deficit. This would hit the value of China’s massive (over $700 billion) holdings of US Treasuries.

Don’t get too excited though. The likelihood of any change in the use of the dollar as a reserve currency is extremely limited. Using the SDR would itself involve many technical issues in terms of how much to issue and whether companies and investors would accept the use of SDRs rather than dollars. Such a move would take years. The reality is that the risks to the dollar have clearly risen and the crisis and money printing by the Fed has fuelled significant risks over the medium term, to foreign holders of US debt such as China. Nonetheless, there is no other currency that is in a position to displace it at the moment and possibly for several years. Eventually the use of the euro and even the Chinese yuan may reach a point when they share the status of reserve currency with the dollar, but this is not going to happen anytime soon. In other words there is no need to go get rid of your Greenbacks just yet.

Posted in Asia, Currencies. Tags: , , , , . 2 Comments »
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